Contingencies to Consider Before You Buy

Did you know that you can make your purchase of a home contingent on receiving answers to questions as well as getting certain information?

If you have previously bought a house or you are a first time home buyer, you probably know that the process of purchasing a home is not like buying anything else. Once your purchase a house, there is usually no option to return or exchange it if you don't like it.

Because of the finality of buying a home, there are several conditions listed in the standard home purchase contract that must be met before the deal can be closed. These conditions include things like financing arrangements, home inspections, insurance and others. These conditions, in legal terms, are called "contingencies."

How do Contingencies Work?

Both the buyer (you) and the seller of a home will most likely ask for a number of contingencies to be written into the purchase agreement. The purchase agreement, or contract, will most likely define a certain amount of time between the signing of the contract, and the closing of the deal. This time period will allow both you and the seller to satisfy all of the contingencies built into the agreement for the home.

You may have to work hard and fast in order to meet all the contingencies, such as securing an insured loan, and will often update the seller as to your status in completing everything that you must.

If any of the contingencies are not met, the contact may be cancelled or renegotiated.

Various Types of Contingencies

When you purchase a house, you will likely run into several types and varieties of contingencies. Standard contingencies include things like a buyer's inspection of the house and satisfaction with the condition that the house is in. Contingencies such as these are often considered a matter of course and their presence within a purchase agreement will likely not be contested.

Other types of contingencies are more uncommon, however, and may be disputed. For example, the seller may wish to condition the sale of the home on his success in finding another home to buy for himself. If you are in a hurry, you may want to contest this contingency or place a limit on how long you will delay the closing of sale in order for the seller to find another house. However, if you are living comfortably, or are in no hurry to move into your new home, you may allow the seller to place this contingency into the agreement in exchange for a contingency of your own. For example, you may wish to condition the contract on the successful sale of your previous home.

What follows is a list of common contingencies that can be found in most home purchase agreements.

Financing/Loan Contingency

Almost all home sale contracts will be contingent upon you, the buyer, being able to secure a loan or other source of financing with which to purchase the house. This contingency may place a time period between signing and closing in which the buyer must secure this funding. For a first time buyer, the large amounts of money involved can seem quite daunting, but keep in mind that this is pretty common. If you are able to pay cash up front for the sale of the home, then you will be able to omit this contingency.

However, this is not to say that you, the buyer, have no choice in what type of financing to accept. You can demand that the contract is contingent upon you getting a loan of a rate of a certain amount or below, or the sale will not go through. For example, if the contract is contingent on the buyer getting a loan at 5% or below, the seller cannot demand that you take a variable-rate loan or a loan at 6% interest. However, the seller may place a contingency in the contract that you work diligently towards getting the stated loan within a certain time period.

Home Inspection

A common contingency within a home sale agreement contract is one that gives the buyer the right to at least one home inspection before a certain date. This contingency should also give the buyer the opportunity to get out of the contract, or demand repairs, if the buyer is not, in good faith, satisfied with the condition of the house.

This home inspection contingency also will generally allow the buyer to send in experts of his/her choosing to make the inspection, such as general contractors and pest exterminators. In addition, if the house is in an area known to have natural disasters such as landslides, then getting an expert in that field to inspect the home may also be demanded.

If you are buying a home that is currently being built, you may want to consider asking for a contingency that would allow you to view the construction of the home at certain points during its construction to make sure that the home is being built up to a certain standard.

Inspection reports may often lead to more negotiations between the buyer and the seller about the purchase price. If, for example, a home needed at least $10,000 in repairs to make it safe, the buyer and seller may renegotiate the purchase price of the home in order to account for the needed repairs.

Insurance

Most homeowners will want to make sure that their new purchase has home insurance before moving in. However, insurance companies have become more and more reluctant to insure properties and homes in certain parts of the country. Because of this, you, as the buyer, may want to demand a contingency in the contract that will allow you out of the sale if you are not able to find and secure adequate home insurance before closing.

Title

This can be one of the most important contingencies for you as the buyer. This contingency will allow you to leave the contract if the seller of the home cannot prove that he or she has valid legal title to the property that is for sale. For example (and this has happened many times), a person renting a home may attempt to scam a buyer by representing to the buyer that he or she has valid title to the home and is legally allowed to sell it. However, by having a title contingency, you, as the buyer, can be secure in the knowledge that tile can successfully pass to you upon closing of the contract.

In addition, there can be certain items on a home title that would make the home less desirable to a buyer. Generally, you want to purchase a clear or "unencumbered" title to the property. For example, if there are easements across the land or if another person is currently contesting title to the home, a buyer would want to know this before committing to the sale. As a buyer, you want to make sure that you have the right to full ownership of the home before buying.

A title report, done by an authorized title company, should be a contingency in almost all home sale contracts. When you purchase a house, be sure that you get the whole house.

What to do next

After considering what kinds of contingencies you want in your home sale agreement, put them in writing as part of your offer to buy the house.

Next Steps

Contact a qualified real estate attorney to helpguide you through the home buying process. (e.g., Chicago, IL or 60611)